Portfolio construction

Can investors count on stock-bond diversification?

October 10, 2021

Kevin J. DiCiurcio, CFA

Head of Vanguard Capital Markets Model Development

Are stocks and bonds moving in tandem?

Wu, Boyu (Daniel), Ph.D., Beatrice Yeo, CFA, Kevin J. DiCiurcio, CFA, and Qian Wang, Ph.D., 2021. The Stock-Bond Correlation: Increasing Amid Inflation, but Not a Regime Change. Valley Forge, Pa.: The Vanguard Group, Inc.

Why long-term investors maintain a balanced portfolio

Correlations in context: Time matters

Short-term trends can vary; long-term positive or negative correlations can last decades
Chart shows short-term fluctuations in stock/bond correlations, including spikes into positive correlations, but also shows a steady long-term negative correlation since 2000.

How much inflation would it take?

Positive correlations require high inflation
Chart projects 24-month rolling stock/bond correlations for different scenarios of average ten-year trailing inflation from 2021 to 2031. According  to our research, 2% average ten-year trailing inflation would result in a 24-month rolling correlation of negative 0.27; 2.5% average ten-year trailing inflation would result in a negative 0.14 correlation; 3% average ten-year trailing inflation would result in a 0.25 correlation; and 3.5% average ten-year trailing inflation would result in a 0.36 correlation.

Asset allocation, more than correlation, influences portfolio outcomes

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